Chapter 13

Question 1

Describe the ways in which you can value assets

Answer 1

Market value.
* No calculation required.
* Regulatory prescription.
* Realistic if bid is used.
* Objective.
* Only known at time of transaction.
* Difficult to value liabilities.
* Large sales volumes.
* May not be available..
* Bid? Offer? Mid?
* Short term fluctuations.
DCF.
* Relies on assessment of suitable interest rate.
* Allows for actuarial judgement.
* Subjective.
Arbitrage value.
* Assumes an efficient market and no arbitrage opportunities.
* Difficult to replicate some investments.
* Can be computationally intensive.
Smooth market value.
Stochastic model.
* Great for derivatives.
Book value.
* Not a fair value.
* Objective.
Written up or down book value.
* Subjective.

Question 2

Describe how you can value property

Answer 2

• Difficult to value because they are traded infrequently, they are unique and they’re opinion based.
• DCF approach
• Discount-rate = Rfr + risk-prem

Question 3

How to value bonds?

Answer 3

• DCF = You spot rate yield curve for interest rate for risk free yield.
• For corporate bonds, adjust the risk free yield to account for security and marketability.

Question 4

How to value equities?

Answer 4

• Market value
• Dividends discount model. This assumes that the interest rate and the growth are constant. No tax or expenses, the interest rate is greater than the growth and dividends are reinvested at the interest rate.
• Net asset value per share.
• Value added measures.